Commentary for the week ending 3-23-12

Coming off the best week of the year, the markets turned in their worst week, though the decline was relatively mild. For the week, the Dow was lower by 1.2%, the S&P returned -0.5%, and the Nasdaq fell 0.4%. Gold sold off most the week but rose on Friday, giving it a return of 0.4%. Oil followed a similar path to gold, ending the week with a -0.7% return and closing near $107 per barrel. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed slightly above $125 per barrel. We will discuss oil further below.

Source: MSN Moneycentral

Though the market declined steadily throughout the week, it was fairly uneventful.

The decline came largely on news of slowing growth around the world, most notably in China. The mining company, BHP Billiton, reported a decline in demand, indicating that slower growth. Since the country is so reliant on commodities for their growth, commodity prices plunged. Metals like gold, silver, and copper were hit particularly hard. Other commodities like oil fell, as well, since less growth would imply less demand for oil.

Housing data released this week also underwhelmed. Demand for homes was not as strong as estimated, adding another pressure on the market.

Though these news items were disappointing, they were not really that unexpected. We believe the selling was largely due to profit taking. With the S&P 500 up over 11% so far this year, the news provided an opportunity to take some gains off the table.

The market did get support this week, though. Goldman Sachs made news by announcing that this was the best time in a generation to buy stocks. We’re not quite sure if we buy that, especially after the run the market has had recently. We can’t forget that Goldman made a similar call on emerging markets about a year ago. In the past year, emerging markets are off over 8% while the S&P 500 is up almost 8%.

The ever-popular Apple continued its run, up 1.8% this week. The week opened with news that Apple would finally be doing something with their mountain of cash. The company announced a dividend, which was a decent move. Additionally, they will be buying back shares of their stock. We aren’t sure if that is the best play at this point, since shares are selling around all-time highs and up nearly 50% this year alone. The stock initially sold off on the news, but rallied back to close just under that $600 mark for the week.

For the remainder of this section we will discuss the situation with oil prices, as average gas prices near $4.00 a gallon. There has been a lot of rhetoric and misinformation that we believed warranted some clarification. Unfortunately the discussion is rather lengthy, but we tried to be as concise as possible.

Politicians like to say there is no “magic bullet” to bring down gas prices and additional drilling is useless. This is entirely incorrect, as we will discuss further below. First, let’s give a little background.

We’ll start with a popular data point that is constantly mentioned. “The U.S. only has 2% of the world’s oil, but consumes over 20%.” Technically this is correct, but is highly dishonest. The 2% figure excludes oil we know about but are unable to access, which includes land put off limit by the government.

Real world estimates vary, but most put the U.S. as having over a trillion - and into the trillions - of barrels in reserves. However, 20 billion barrels is the figure the government uses for that 2% of supply number, since that is all we can currently prove lies in those permitted areas.

What’s interesting is that in 1944, it was estimated that the U.S. had the same 20 billion in reserves. Yet since that time, we produced almost 170 billion barrels, showing how unreliable these estimates are. More realistic estimates show that we have enough recoverable oil to last 200 years.

Another true fact, the U.S. has increased production in the last couple years. Thankfully, this has come about due to technology advances, making drilling in shale areas more economical. The increase is due to the drilling on private lands, as drilling on federal land has actually declined. The government can not take credit for this increase in drilling, as many in Washington are doing.

In reality, the government has made it more difficult to recover oil. More land has been placed off limits and only 85% of offshore areas are open to drilling.

Additionally, obtaining a permit to drill has become more costly and time consuming. Only 23% of drilling plans have been approved, whereas the average is closer to 75%. The amount of deep water drilling permits is running at 30% below average and permits are actually down under this administration.

Once the oil is out of the ground, it must be sent to refineries to be turned into gas. This is where additional pipelines would help, since there is a glut of oil at the main refining crossroads of Cushing, OK.

The glut at Cushing is caused by several factors. One is the increase in supply from shale oil in the Bakken and oil sand regions, which is a nice problem to have. But another reason for the overabundance is the lack of refineries to send the oil to.

In 2010, there were 12 refineries on the East coast. Since then, four refiners have shut down due to high costs. The Wall Street Journal reported this week that another refinery owned by Sunoco was also looking at shutting down. The increased costs stem from increased regulations by the EPA. Obviously when 1/3 of the refining capacity is lost, prices will rise.

That leads us to the immediate solutions. Scaling back on EPA regulations can alleviate the burden on refiners, bringing additional supply back online. A pipeline to move the oil also helps.

Another problem is the weak dollar. With commodities priced in dollars, when our currency declines, it takes more dollars to buy that commodity. As you can see in the chart on the right (provided by Investors Business Daily), there is a strong correlation between the price of oil and the value of our currency. Easy money policies from the Fed weaken the dollar and cause a rise in oil prices.

The administration is trying to attack the high prices from the demand side. While calling oil the fuel of the past, the focus is more on solar and wind energy, which are very costly and ineffective solutions at this time. They try to reduce consumption by demanding higher mileage requirements on vehicles. This is the problem and is clearly not working.

The best way to bring down the price of oil is to realize that oil is a market, like any other commodity. It is forward-looking, so it will move based on expectations of the future. At this point, the market sees nothing in the future that gives any reason to sell. The market needs some reason to sell.

Even an announcement of further drilling will bring down prices. If you recall back to 2008, prices were also spiking. As oil crept towards $150 per barrel, President Bush made an announcement that the federal moratorium on offshore drilling would be lifted. Prices immediately dropped, and that week marked the very top in oil prices. It doesn’t matter that production won’t come online for years, as this is how the market works. Oil needs a reason to sell, it just hasn’t seen that reason yet.


Next Week

It will be a fairly busy week next week in terms of economic data. There will be more data on housing, plus info on consumer confidence, durable goods (which are items that have a long life, like an appliance), personal income and spending, and info on manufacturing.

Next week will be the last week of the quarter, as well. That could mean upward pressure on stocks as professional investors buy up winning stocks to improve the appearance of their portfolios. This is often referred to as ‘window dressing’.


Investment Strategy

Little change here. Investors are extremely bullish (optimistic) at this time. When investors get this excited, though, we get nervous. Right now we are not actively adding any new money, but are holding back on selling, too.

Like we mentioned last week, the VIX index is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week it continued to slide lower, again reaching new five year lows. That shows complacency in the market and possible signs of topping.

We would still look to add new money on a pullback, with a focus on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find undervalued individual stocks at any point.

There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Companies related to auto repair and very low end retail businesses also look promising.

We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would still be hesitant to add more at this level.

We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now and have looked to short them (bet on the prices falling). Yields declined slightly this week, but are still above the recent average. There is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into this bond market move. Still, the short bond position provides a nice hedge here, but we still think the potential for profit is low at the moment.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).

Finally, in international stocks, we favor developed international markets as opposed to emerging.

These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 3-16-12

It was the best week for the markets so far this year with new highs again reached. For the week, both the Dow and S&P gained 2.4% while the Nasdaq rose 2.2%. Gold had a rough week, falling 3.2%. Oil also sold off slightly, down just 0.3% to $107 per barrel, yet remains very high. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed near $126 per barrel.

Source: MSN Moneycentral

The stock market just continues to chug higher. The Dow pushed its way through that 13,000 level it seemed to be stuck under for several weeks. In its rise this week, the Dow also reached highs not seen in over four years. The S&P 500, too, reached its highest level in four years. More impressively, the Nasdaq reached levels last seen in late 2000.

There were several stories contributing to the market gains this week. The biggest catalyst came late Tuesday with news of the banks passing the latest round of stress tests. It caused the market to spike sharply higher, as you can see in the chart above.

With these stress tests, the Fed was checking to see if banks would have enough cash available if another crisis were to occur. They assumed things like a 50% drop in the stock market, lower housing prices, and the unemployment rate rising to 13%. Of the 19 banks tested, only one did not pass, Ally Bank. Three others, including Citi, were near that failure level. In the end, the news gave a big boost to banking stocks and the market followed suit.

Also on Tuesday, the Fed held a policy meeting where they issued a positive statement on the economy. That news also contributed to the large Tuesday gains.

The Fed statement was important in that it meant another round of stimulus was off the table – at least for the time being – since an improving economy does not warrant further stimulus. Without the prospect of this stimulus, gold dropped sharply, since gold had risen on the prospect of further money printing.

Treasury bonds also sold off sharply, which meant yields rose. The yield on the 10-year bond had been stuck at or below 2% since October but rose to 2.3% this week. These yields are tied to things like mortgage rates, so the cost to borrow could tick higher. The Fed likes lower rates since it means more borrowing, and thus a strengthening of the economy, in their eyes. Hence their desire to keep rates low.

There was some decent economic data this week. New manufacturing reports showed growth and retail sales rose to the highest level in five months.

Inflation reports showed another uptick as both the CPI and PPI rose 0.4% in the last month. Over the past year, the CPI rose 2.9% and PPI rose 3.3%.

As you are probably aware, we have a tough time accepting these measurements as an accurate reflection of inflation, largely due to the “massaging” involved in reaching a final number.

Just last week, the American Institute of Economic Research released its Everyday Price Index, which is a measurement of prices people actually pay for everyday items. This includes things like food, energy, cable bills, etc., while excluding big items like cars or homes. Their index showed a gain of 8.1% in the past year, as any regular grocery shopper can confirm.

A timely example of another problem with these inflation measurements can be seen in the Friday release of the new Apple iPad. Like the iPad 2, the new model went on sale for $500. So both models cost the exact same when released. However, since the newer model has better “stuff” inside, this new iPad is technically worth more than its predecessor. Yet since it sells at the same price, it is actually considered deflation (it is worth more, but sells for less, hence deflation). This makes inflation look lower than it actually is.

Speaking of Apple, shares of the company touched the $600 mark this week and are up almost 45% since the beginning of the year. No doubt this has been an amazing run.

There was an article this week in the Wall Street Journal about dozens of mutual funds owning Apple stock, but they weren’t mutual funds you would expect. 40 mutual funds with a focus on dividends own this stock, yet Apple has never paid a dividend. 50 funds aimed at small and mid cap stocks own Apple, but it is the biggest stock out there.

When investors get this euphoric about a stock, we have to worry. However, we have worried about this stock for many months and have clearly been wrong as it just keeps climbing higher.


Next Week

Next week will be a bit quieter in terms of data. There will be a slew of data releases on housing, plus the leading economic indicators. We will also get earnings releases from some large companies like General Mills, FedEx, and Oracle.


Investment Strategy

It seems like we are in another one of those periods where the market rises no matter what. Obviously it rises on solid economic data, like it did this week. But it also rises on negative data when it knows the Fed will step in with more stimulus. We saw that with the market drop last week when news of another stimulus pushed the markets back up. It is tough to make decisions when government agencies have such an effect on the market.

When investors get this excited, though, we get nervous. At this point we are not actively adding any new money, but are holding back on selling, too.

There are some headwinds we are concerned with for the future. High and climbing gas prices remain a serious concern. Absolutely asinine rhetoric out of Washington does little to help the problem, as well. Perhaps we will get into this topic with a little more detail next week.

A little known index to many investors, but widely watched in the industry, is the VIX index. Without getting to detailed, the VIX is basically a measure of volatility. It spikes higher when investors are more worried and markets are volatile. This week, though, the VIX hit a five year low. That shows complacency in the market and possible signs of topping.

We would still look to add new money on a pullback, with a focus on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find undervalued individual stocks at any point.

There are several long term ideas we are especially bullish (optimistic) on. As we mentioned in the previous weeks, we like oil producers, especially ones related to the shale oil play. Plus companies related to auto repair and very low end retail businesses.

We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. With the recent gold sell-off, the commodity is beginning to look oversold. However, we would be hesitant to add more at this level.

We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now and have looked to short them (bet on the prices falling), and actually got some relief on this position this week. However, there is always the option for the Fed to step back in and drive rates down, so we aren’t reading too much into the bond market move this week. Still, the short bond position provides a nice hedge here, but we still think the potential for profit is low at the moment.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).

Finally, in international stocks, we favor developed international markets as opposed to emerging.

These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 3-9-12

Although we had a lot of movement in the markets this week, stocks ended with little change. For the week, the Dow was off 0.4% to 12,922, the S&P rose just 0.1%, and Nasdaq was higher by 0.4%. Gold roughly mirrored the movement of stocks, returning 0.1%. Oil remains high at $107.40 per barrel and rose 0.7% this week. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed at $126 per barrel. These high oil prices remain a serious concern.

Source: MSN Moneycentral

The Dow is having a hard time breaking through that 13,000 level. We first reached this point 3 weeks ago and have hovered below it ever since. We received some economic data this week that was decent, but new headlines out of Europe muddied the waters a bit.

Greece was back making news as they were to finally restructure their debt. Basically that meant Greece would reduce the amount of debt they owe and investors would lose a lot of money on their bonds. To be binding, the bondholders actually had to agree to the terms of the restructuring, which is not an easy task.

On Tuesday, it looked like Greece would have some difficulty in getting that agreement and the markets sold off sharply. At least, that was one reason for the sell-off.

We saw the Greek news as more of as an excuse to take profits, since the news wasn’t that significant. The market has steadily risen without a pullback, with the S&P up over 9% for the year and well over 20% since the October lows. A climb like this without a pullback makes many investors anxious (including us), and the news provided a reason to sell. We think the drop was mostly a round of profit taking by anxious investors after this remarkable run.

The Greek debt situation was wrapped up by the end of the week, though, with a solid majority of bondholders accepting the restructuring deal. These bondholders will take a loss of over 50% on their investment, erasing a little over €100 billion (or around $130 billion) in debt from their books. This default is the largest ever for a sovereign country.

So why would anyone agree to a loss of over 50% on their investment? There are many reasons why, but for one thing, it may be better than the alternative of nothing.

One of the other reasons is that many investors had insurance on their investment through the CDS market (the CDS, or Credit Default Swap, market provides a financial product that acts like insurance and pays out in case of default). This restructuring was seen as a default, so the CDS will pay out a chunk of money, similar to the way an insurance company would have to pay out for a claim.

At any rate, the market drop on Tuesday was the largest of the year and had many wondering if this was the beginning of the next leg down. However, the Fed decided it would have none of that.

On Wednesday morning, the Wall Street Journal reported that the Fed was contemplating a new round of stimulus (you can see the rise in the market around mid-morning when the story was released). Without getting too into the details, the Fed would be buying more bonds to drive down interest rates and spur lending.

With the market so dependent on stimulus, it was no surprise they rose steadily on the news. It also sent commodity prices higher and the strength of the dollar lower.

It has become a frustration to have the Fed constantly intervene in the market. For one thing, this isn’t their job. Their purpose is to stabilize prices and promote employment. These stimulus programs seem to do the exact opposite. Prices continue to rise as the dollar weakens and employment shows only slight growth (which we will touch on later). Interest rates are already at historic lows, so we aren’t sure what more they can accomplish.

We long for the days when the market can function on its own, without the constant meddling by the government and its agencies.

Economic data this week was mostly good. Service sector businesses showed solid improvement and consumer borrowing also showed growth (well, the market likes this increase in borrowing, but we don’t agree that increases in debt are a positive). On the other hand, our trade deficit increased to the largest level in over three years as our exports have slowed considerably.

Also this week we got information on the employment picture. In the month of February, the economy gained 227,000 jobs, slightly better than estimates and the official unemployment rate held steady at 8.3%.

These figures were still decent as any growth is a positive, but they still leave much to be desired. Digging a little more into the data, about half of the jobs were low paying positions and 45,000 of those are temporary jobs. The labor participation rate did tick higher, but if we were to figure the unemployment rate using the size of the labor force at the beginning of the recession, our unemployment rate would be over 10%.


Next Week

Next week will again be a busy one as we get several economic reports. There will be info on retail sales, manufacturing strength, employment with the JOLTS report (which gives a more accurate and detailed look at employment, but lags by a month), and inflation with the PPI and CPI reports.

Of particular importance, we will be watching the effect the solar storms will have on the markets. We say this lightheartedly, but for those of you who like looking at historical data, Bloomberg reported that the stock market traditionally sells off after a solar storm. In the six days after its occurrence, historically, the return on the S&P is -0.76%, the Nasdaq is -2.51%, and -1.76% for all stocks listed on the New York Stock Exchange.


Investment Strategy

While we mentioned above that we would love to see the Fed leave the market alone, complaining about it doesn’t make us any money. If the Fed will keep stepping in and propping up the market, odds are the market will go higher.

We still remain cautious, but it’s hard to be too pessimistic with the Fed lurking with their money printing presses. At this point we are not actively adding any new money, but are holding back on selling, too.

We would still look to add new money on a pullback, with a focus on large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. Also, there is always the opportunity to find undervalued individual stocks at any point.

There are several long term ideas we are especially bullish (optimistic) on. With the high oil prices, we like oil production companies, especially ones related to the shale play, and would add to these positions on a pullback.

We also like businesses related to auto repair as people hold on to their cars for longer periods, despite the appearance of recent sales growth. Many think car sales will eventually increase, but we don’t. Fuel efficiency requirements have raised the costs of new vehicles (and will dramatically raise costs in the future). The price of used cars has increased, too. Older cars mean more repairs. Still, these stocks are also expensive and would look to buy on a pullback.

The other idea we like is very low end retail stores. These companies will do well as costs increase and shoppers look for bargains.

We like commodities for the long term but fear a slowdown in China and the other BRIC countries (Brazil, Russia, and India), who have been major drivers of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. Even at these recent low levels, we would be hesitant to add more at these here.

We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now, and have looked to short them (bet on the prices falling). However, that is looking like a lost cause. With the Fed keeping rates low as far as the eye can see, the likelihood of yields rising in the near term is slim. We thought the bond market would force rates higher, but fighting the Fed has simply been a losing proposition. A short bond position provides a nice hedge here, but the potential for profit is low at the moment.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).

Finally, in international stocks, we favor developed international markets as opposed to emerging.

These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the week ending 3-2-12

The Dow danced around its 13,000 level for much of the week but ended relatively unchanged, along with the other major markets. For the week, the Dow closed down just 0.04% to 12,977, the S&P rose 0.3%, and Nasdaq was higher by 0.4%. Gold hit 3-month highs only to sell off sharply, closing the week down 3.7%. Thankfully oil also sold off, down 2.8% to $108 per barrel, although gas prices remain frustratingly high. Brent crude (the other major oil type, used in much of the gas here on the East coast) closed at $123 per barrel.

Source: MSN Moneycentral

The Dow had a hard time moving above this psychologically important 13,000 level. It closed above there only once this week, on Tuesday, and popped higher early Wednesday. From there, though, it trended lower for the remainder of the week.

We had a lot happening on Wednesday to move the market. Fed chief Ben Bernanke testified in front of Congress and spoke of his cautious view of the economy. He did strike an upbeat tone on the employment situation, though. For the time being, that has him sidelining any additional stimulus for the next couple months.

With a stock market so hungry for stimulus, the news was not welcomed and the markets dropped sharply. Since further stimulus (or money printing) is a negative for the strength of the dollar, our currency strengthened in its absence. And since commodities go higher with a weaker dollar, they fell on the news. Gold sold off strongly and finished the day down over 4%.

Europe also was in the headlines. Yields came down on Euro-country bonds, which was interpreted as European countries now being seen as less risky (like with a credit card, the higher the interest rate (or yield), the more risky a borrower you are and the harder it is to pay back your debts).

Of course there is more to this story. The European Central Bank (or ECB, which is the European version of our Fed) loaned out over $700 billion to European banks at a very low interest rate. Those banks then took that money and invested it back into bonds of those European countries. That pushed down the interest rates for the country. And the bank gets free money, literally, by borrowing at a very low rate and invests in something at a higher rate.

Similar to here, this doesn’t really solve any problems. It floods the market with cheap money and papers over a problem for the time being. In giving the $700 billion to European banks, the ECB printed it out of thin air, just like our Fed does. At some point we will feel the negative effects of these policies, but only when they are unable to kick that can any further down that road.

Switching gears, the technology company, Apple, made headlines this week. With its 35% climb year to date (35%!) Apple crossed the $500 billion level in market capitalization (market cap is the share price multiplied by the amount of shares outstanding). It is only the sixth company in history to reach this level and is currently the largest company in the world.

Staying on this tech theme, a new company began trading on the stock market Friday, Yelp. It’s yet another one of those funky one-word-named social media companies that has begun trading in recent months. Like the others, this company has never made a profit. Yet its share price skyrocketed and the company now has a market cap of $1.5 billion. Pretty impressive for a company that has never turned a profit. Obviously we just don’t get it.


Next Week

Next week will be fairly busy. Corporate earnings will be light, but we will get several economic reports. There will be info on the strength of the service sector, productivity, consumer credit, and most importantly, the unemployment figures for last month.


Investment Strategy

The market seems to have stalled around this level and we remain cautious. We see more risk to the downside, but are not actively selling at this point. We are very reluctant to add any new money here, though.

If we were to get a pullback, we would put money into large cap higher-quality stocks, particularly companies with operations overseas. Smaller and little-known stocks with low correlation to the market are also promising. There is always the opportunity to find undervalued individual stocks at any point.

There are several long term ideas we are especially bullish (optimistic) on. With the high oil prices, we like oil production companies, especially ones related to the shale play, and would add to these positions on a pullback.

We also like businesses related to auto repair as people hold on to their cars for longer periods, despite the appearance of recent sales growth. Many think car sales will eventually increase, but we don’t. Fuel efficiency requirements have raised the costs of new vehicles (and will dramatically raise costs in the future). The price of used cars has increased, too. Older cars mean more repairs. Still, these stocks are also expensive and would look to buy on a pullback.

The other idea we like is very low end retail stores. These companies will do well as costs increase and shoppers look for bargains.

We like commodities for the long term but fear a slowdown in China, who has been a major driver of commodity prices. Debt problems and continuing bailouts around the world should be favorable to commodities like gold in the long term. Even with the pullback this week, we would be hesitant to add more at these higher prices.

We have been looking for Treasury bond yields to rise (and thus prices fall) for some time now, and have looked to short them (bet on the prices falling). However, that is looking like a lost cause. With the Fed keeping rates low as far as the eye can see, the likelihood of yields rising in the near term is slim. We thought the bond market would force rates higher, but fighting the Fed has simply been a losing proposition. A short bond position provides a nice hedge here, but the potential for profit is low at the moment.

On the bond theme, we think TIPs are important as we still expect inflation to increase. Municipal bonds also work and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).

Finally, in international stocks, we favor developed international markets as opposed to emerging.

These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.